Caroline Ellison, former CEO of Alameda Research LLC, center, arrives in court in New York, U.S., Tuesday, Oct. 10, 2023.
Yuki Iwamura | Bloomberg | Getty Images
In sentencing FTX founder Sam Bankman-Fried to a 25-year sentence on Thursday, Judge Louis Kaplan cited testimony from Caroline Ellison, the defendant’s former girlfriend and early recruit to his crypto venture.
“I keep coming back to Ms. Ellison’s testimony that he knew it was wrong,” Kaplan said during the sentencing hearing in midtown Manhattan. “He knew it was criminal.”
Ellison was the Justice Department’s star witness in the prosecution of Bankman-Fried. She agreed to a plea deal in December 2022, a month after FTX filed for bankruptcy.
As part of his testimony in the criminal trial late last year, Ellison provided the government and jurors with text messages, documents and secret recordings that ultimately helped lead to Bankman-Fried’s conviction on all seven charges against him.
Manhattan U.S. Attorney Damien Williams said in a statement after Thursday’s sentencing that Bankman-Fried’s “deliberate and continued lies demonstrate a blatant disregard for his clients’ expectations and a disregard for the rule of law, all so that he can covertly use his clients money to expand their own power and influence.”
Ellison, who ran hedge fund subsidiary FTX Alameda Research, pleaded guilty to two counts of wire fraud, two counts of conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.
Although Ellison faces similar sentencing guidelines as Bankman-Fried, she is expected to receive a much lighter sentence because of her role as a cooperating witness.
Caroline Ellison is questioned as Sam Bankman-Fried watches during his fraud trial before U.S. District Judge Louis Kaplan over the collapse of FTX, the failed cryptocurrency exchange, in federal court in New York, Oct. 11, 2023, in this sketch by the courtroom.
Jane Rosenberg | Reuters
Ellison’s complex ties to SBF
Ellison jumped into Bankman-Fried’s crypto orbit in 2017.
She worked as a merchant on Jane Street, where Bankman-Fried began working in finance. Bankman-Fried reportedly convinced the Stanford graduate to give up her Wall Street gig and join Alameda when the hedge fund was still in its original Bay Area office.
Ellison spent years as Bankman-Fried’s friend and sometimes his roommate. She followed Bankman-Fried from California to Hong Kong and finally to The Bahamas, as Bankman-Fried repeatedly moved the headquarters of its crypto companies.
Michael Lewis writes about Ellison in his book Going Infinite, which chronicles the rise and fall of Bankman-Fried. In 2021, Ellison was promoted to CEO of Alameda, a job that Lewis reports neither Ellison nor Bankman-Fried felt particularly suited to.
“Caroline sensed that even when Sam promoted her to CEO of Alameda Research, he disapproved of her workâand she shared his opinion,” Lewis wrote.
Lewis shared an excerpt from one of the notes Ellison sent to Bankman-Fried. “I feel like I’m doing a much worse job of running Alameda than you would if you were working on it full time,” she wrote.
In April 2021, Ellison tweeted on “regular amphetamine use” in a thread that also talked about the “herculean” effort it took her to get off her couch and go for a hike.
Court documents show that Ellison compensation pales in comparison to other senior executives. Of the $3.2 billion in payouts to the exchange’s founders and other senior officials, FTX’s head of engineering, Nishad Singh, received $587 million, co-founder Gary Wang received $246 million, and $2.2 billion went to Bankman-Fried . Ellison received $6 million.
Some of Ellison’s personal diary entries were leaked by Bankman-Fried to The New York Times, who published report for them last July, months before the trial. The act eventually landed Bankman-Fried back in prison after Kaplan revoked his bond for alleged witness tampering.
In a February 2022 Google document shared with the Times, Ellison wrote: “I’ve been feeling pretty miserable and overwhelmed by my work… At the end of the day, I can’t wait to go home and turn off my phone and have a drink and get away from it all.”
She added: “There doesn’t really seem to be an end in sight.”
“Trying to fix problems”
But in the courtroom, jurors heard from Ellison for the first time.
U.S. Attorney Thane Wren said during the trial that Bankman-Fried “used her as a front” when “in reality he still runs Alameda.” During her days of testimony, Ellison helped prosecutors build a narrative that she acted on Bankman-Fried’s instructions, helping him steal money from FTX clients and use it to support Alameda, who was then struggling in crypto the winter.
Ellison said Bankman-Fried was still Alameda’s CEO when the funneling of money began. She said she was under the impression that it was money of FTX clients, as the sums exceeded the profits of the exchange and the amount of capital she had raised.
In mid-2021, when FTX buys equity in the company back from a competitor and an early investor Binance, FTX used $1 billion in customer funds for the transaction, Ellison testified.
Ellison said she considered retiring from Alameda at various times from 2019 to November 2022.
In one of her Google documents, Ellison had a section titled “limiting factors in scaling,” which she said referred to things that were holding Alameda back. The first thing she listed was management, including a comment about her former co-CEO Sam Trabuco.
“I feel that neither Trabucco nor I have done a good job of pushing things,” she wrote. “We’re in status quo mode and we’re trying to fix the problems.”
Regarding the commingling of operations between FTX and Alameda, Ellison admitted on the stand that the two firms did not have a proper “Chinese wall” separating the businesses.
During her testimony, Ellison barely avoided eye contact with Bankman-Fried, staring at her hands between questions and often brushing her hair over her left shoulder. Bankman-Fried also often looked away, hands clenched.
Ellison told the jury that her breakup with Bankman-Fried in the spring of 2022 affected communication between the two. They spoke mostly on Signal, even though they shared an apartment and largely avoided each other outside of work.
Danielle Sassoon, the assistant U.S. attorney representing the government, told Kaplan several times that “the defendant was laughing, visibly shaking his head and mocking,” which she said may have had an effect on Ellison “given the history of this relationship, before trying to intimidate her, the power dynamics, their romantic relationship.”
Caroline Ellison, former CEO of Alameda Research LLC, arrives in court in New York, U.S., Thursday, Oct. 12, 2023.
Bloomberg | Bloomberg | Getty Images
Secret records and texts
Of the hundreds of items entered into evidence during the trial, a bank of messages in an encrypted Signal app was among the most damaging to Bankman-Fried.
The government presented a series of signal exchanges involving Bankman-Fried, Ellison, Wang and other top executives. In one such exchange on November 8, 2022, Ellison reached out to Bankman-Fried and other members of the inner circle, asking for help with optics and public messaging.
Prosecutors relied heavily on text messages sent between FTX executives and Alameda Research in the case against Sam Bankman-Fried.
Source: SDNY
She wrote: “I’ve had a lot of people internally asking me if they should continue to make statements to outside parties like ‘Alameda is solvent.’ should I suggest they slow down instead? just delay replying to their messages? or what?”
That day, FTX paused all customer withdrawals.
The next day, Ellison again approached the group for guidance on how to deal with general meeting for about 30 Alameda employees.
Ellison’s suggestion was to tell them, “Alameda will probably pull out” and that there was “no pressure” for them to stay, but help with “things like making sure our creditors get paid” would be “super appreciated.”
Bankman-Fried suggested she say something about “there’s some future for those who get excited.”
Prosecutors relied heavily on text messages sent between FTX executives and Alameda Research in the case against Sam Bankman-Fried.
Source: SDNY
Ellison ended up revealing much more than that at the staff meeting, the secret recording of which was played for the jury.
“Alameda borrowed a bunch of money” that it used to make investments, Ellison said at the meeting. But as cryptocurrency prices fell, “FTX had a shortage of user funds” and then “users started withdrawing their funds” and they “realized they wouldn’t be able to continue.”
When asked by an employee whose idea it was to cover Alameda’s loan losses with FTX customer money, she said, “Um, Sam, I guess,” and giggled.
“FTX has actually always allowed Alameda to borrow consumer funds as far as I know,” Ellison said.
https://www.cnbc.com/2024/03/28/caroline-ellison-sbf-ex-girlfriend-helped-put-ftx-founder-in-prison.html
